U.S. stocks suffered their worst one-day losses in more than a year on Thursday as unfavorable news about unemployment and the prospects of economic growth in this country piled onto deepening angst about the debt crisis in Europe.

The Standard & Poor's 500-stock index, a broad measure of U.S. markets, fell 3.9 percent to its lowest level since February. All three major U.S. stock indicators are now down more than 10 percent from their recent peaks in April. That puts the market in correction territory, meaning stock values may be adjusting to offset an excessive run-up in prices.

The question on the minds of investors now is whether the market is headed lower.

"The level of uncertainty has gone up, and people are voting with their feet out of the market," said Paul Zemsky, head of asset allocation for ING Investment Management. "They're asking questions later."

Europe's financial troubles remain at the heart of the sell-off. Investors are worried that the debt crisis that threatens to push Greece into default will spread to other deeply indebted European countries and derail a global economic recovery despite massive financial rescue packages.

Those fears are driving investors into the safety of government bonds, a shift that has pushed yields on 10-year Treasurys to their lowest levels of the year. Since the problems in Greece flared, the euro has slipped to a four-year low against the dollar.

Investors are also dumping commodities -- even gold. Crude oil slid 2.7 percent to $68.01 a barrel in New York and at one point during the day fell to $64.24, the lowest level since last July.

Roger Diwan, oil analyst at Washington-based consulting firm PFC Energy, said that all financial markets were down, "and since oil is mainly a financial instrument, that's not surprising."

Investors were also rattled Thursday by unexpectedly weak reports on the U.S. economy. The Labor Department said that the number of workers filing new unemployment claims climbed in the week ended May 15, with initial claims rising by 25,000, to 471,000. Most economists had predicted that jobless claims would fall.

A separate report by the Conference Group, a private research firm, showed that the index of leading economic indicators fell 0.1 percent in April, its first drop since March 2009. Economists surveyed by Bloomberg had been expecting a slight increase.

Thursday's sell-off in U.S. markets began with shares plunging at the opening bell. Stocks pared back some of those losses by mid-afternoon before tumbling again in the last half-hour of trading after the Senate cleared the way for a final vote on a hotly contested overhaul of financial regulations.

The S&P 500 fell 43.46 points to 1071.59, its first close in three months below 1100. The Dow Jones industrial average shed 3.6 percent, or 376.36 points -- its steepest drop since the depths of the financial crisis in March 2009. It closed at 10,068.01, with all 30 blue-chip stocks down. The Nasdaq slumped 4.1 percent, or 94.36 points, to close at 2204.01.

Every major European index fell on Thursday, with the FTSE 100 in Britain down 1.7 percent, the DAX in Germany down 2 percent and the CAC 40 in France down 2.3 percent. The declines spread to Asia on Friday, with the Nikkei average in Japan sliding more than 2.5 percent in early trading.

The market chaos signals that investors have lost faith in the ability of European leaders and regulators to contain the continent's debt problems, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

Ablin singled out German Chancellor Angela Merkel's statement Thursday in which she said that politicians are "no financial experts." Merkel was trying to defend her government's ad hoc decision to ban naked short selling of certain bonds and stocks.

The problem was that the decision came without warning to other European Union countries, said Dan Greenhaus, chief economic strategist at Miller Tabak. While the E.U. did not necessarily take issue with the ban, the element of surprise injected uncertainty into the market, Greenhaus said.

"People don't know what's going on right now or who's doing what," he said. "There's a lot of nervousness and a lot of money being taken off the table."

Tse reported from New York. Staff writer Steven Mufson contributed to this report.